ROTH or Traditional IRA: Which Is Best?

Roth vs IRAWhat makes the most sense for you, staying with a regular individual retirement account or converting to a Roth IRA? This is not a simple question so there is no simple answer. But here are some things to ask yourself.


An individual retirement account is a great retirement savings tool for most individuals. Created by the federal government, IRAs are funded during your working years.  In your retirement, IRAs may help supplement your Social Security benefits.


Your retirement savings begin with your annual IRA contribution. If you are under age 50, the current maximum annual contribution amount is $5,500, according to the Internal Revenue Service.  For those 50 years and older, you can contribute an additional $1,000. So if you turn 50 this year, you are now eligible to contribute $6,500. The contribution amounts are adjusted for inflation each year by the federal government.


With a traditional IRA, you put money away and deduct it until you withdraw from the account in your retirement. You pay tax on withdrawals. Converting to a Roth IRA means you pay tax on your old account up from it, and from then on the account grows tax-free. Opening a Roth without converting is done with after-tax dollars, meaning you already paid the government.



To find out which of the two types, traditional or Roth, is best suited for you, here’s a quick way to weigh the pros and cons of each.


The advantages to a traditional deductible IRA:


Tax Deductible.  Your contribution is deductible on your federal income tax return for the year in which you contribute.


Tax-Deferred Growth.  Your contribution grows tax deferred until you withdraw the money. This means you do not pay any taxes while your money is growing.


Limitations to a traditional deductible IRA:


Adjusted gross income (AGI) limitations.  The amount you can deduct is limited based on your AGI and, if you participate in your employer sponsored retirement plans. Your contribution may be fully deducted on your income taxes, partially deducted or not deductible at all.


10% Penalty.  This is imposed to encourage IRA owners to keep their money in their retirement account until reaching age 59 ½. If you withdraw any of your money prior to then, you incur the 10% penalty on the amount you withdraw. There are some exceptions to the rule: educational expenses, first-time home purchase and certain medical expenses.


Advantages to a Roth IRA:


Avoid taxes in the future. Roth IRAs grow tax-free. Therefore, no taxes are due when you withdraw your money.

No Required Minimum Distributions (RMD).  Roth IRAs do not require RMDs after age 70 ½, so your money can continue to grow with the potential for larger dollar amounts to leave to heirs.


Limitations to a Roth IRA:


AGI limitations.  For high wage earners (2017 limits – single filing over $133,000 and married filing jointly over $194,000), Roth contributions are not allowed.


Disqualified distributions. The earnings in your Roth must remain in the account for five years (known as the five-year clock) and until you reach 59 ½ years. A 10% penalty is applied to earning distributions that do not meet these requirements.


Always consult a financial advisor or IRS publication 590 before you make your final IRA decision. Making the correct IRA choice now can benefit you down the road in your retirement.

Kimberly J. Howard,CFP

KJH Financial Services


Withdrawing From a 401(k) Know Your Options

401k distributionYou contributed to a 401(k) retirement plan for years and your employer added some matching funds. Now that you’re ready to retire it’s time to think about how to withdraw your money.


Two sets of rules govern your 401(k). Both the Internal Revenue Service and your plan administrator (probably your employer) oversee what you can do with the account. The IRS controls how your choices affect your taxes, the administrator how you invest and can withdraw assets.


If you’re 59½ or older, you can withdraw funds from your 401(k) without paying a tax penalty (generally 10% of what you take out). Under some circumstances involved in leaving a job, you can also withdraw a lump sum penalty-free if you’re older than 55.


Note: You avoid penalties, not ordinary income taxes. Some retirees delay taking withdrawals as long as possible, often to help savings compound safe from taxes.


Beginning the year you turn 70½, you must begin taking annual required minimum distribution (RMD) withdrawals. The amount is related to your life expectancy. To estimate your RMD, divide one by the number of years of your life expectancy, according to the IRS, and multiply that by the value of the assets in your 401(k).


Most financial advisors recommend that you take your money out of the 401(k) once you retire, either as a one-time distribution or as a rollover (a penalty-free transfer) into an individual retirement account. You avoid plan fees and gain greater flexibility in investing your funds.


If you decide to keep your money in the 401(k), you must adhere to the rules affecting both your options for distribution and your investment choices. Check with your plan administrator to find out how to take out your money; most will allow you to make periodic or regularly scheduled withdrawals. Other rules may also cover your RMDs or when and how often you can change your distribution options.


Again, withdrawals will be added to your taxable income unless you roll them over into a qualifying IRA. (Check the IRS chart to see how to safely transfer money from one kind of retirement account to another.)


Rolling into an IRA may well be your best choice: You have lower fees, more investment choices and similar distribution rules but can still let your money compound tax-free.


If you plan to take your distribution in cash, do some tax planning. Taking a regular distribution will allow you to spread the taxes and keep you in the lower tax brackets. Taking a lump-sum distribution might throw you into a higher bracket designed for the wealthy; your distribution will also incur a 20% withholding that you can apply to your next year’s tax bill.


A popular option is to take part or all of your distributed funds and buy an annuity to provide steady retirement income. Annuities come in various types. Retirees tend to prefer ones that provide guaranteed lifetime payouts.


Proponents point out that with an annuity you can’t outlive your money. You need to realize, though, that not all annuities are indexed for inflation (currently less than 1%). Your monthly guarantee might look good today yet buy much less in 20 years if prices rise.


You face the culmination of years of saving, and your moves will affect your finances for the rest of your life. You must think about many variables: how much you saved; your investment philosophy; your income needs, expected longevity and tax situation. Even your children’s financial situation can sway your decision.


No one choice suits everyone.